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Adverse Event Reporting a Key Issue in the Zicam Case

The long-term viability of Scottsdale-based Matrixx Initiatives could be in doubt as company officials work to mitigate consumer fears about the safety of its Zicam homeopathic cold remedies in the wake of an FDA warning letter that the company received on June 16. In the letter addressed to Acting President, CFO and COO William J. Hemelt, the FDA identified two products, Zicam Cold Remedy Nasal Gel and Zicam Cold Remedy Swabs, as potentially harmful products that could cause the temporary or permanent loss of smell, a condition also known as anosmia. The company has voluntarily taken both products off the market based on the warning from the FDA.

The full implications of the product withdrawal are still unclear, as Matrixx scrambles to address the concerns of consumers, media, FDA and now the Securities and Exchange Commission (SEC), which has launched an informal inquiry into the product withdrawal. Company officials, while insisting that the FDA’s actions are unwarranted, have initially estimated the costs of a recall to be around $10 million, Hemelt said on a June 18 media conference call. However, those costs could rise significantly if retailers refuse to carry Matrixx Initiatives’ other products. The combined sales of the two products in question represent 40% of the company’s 2009 net sales, according to company financial releases. In addition, the FDA will require the company to file a New Drug Application (NDA) for approval on its zinc gluconicum products, which is a process that requires significant funding. The immediate costs the company faces don’t factor in potential losses due to brand damage or pending litigation, both of which could ultimately contribute to the company’s demise.

Matrixx paid $12 million in 2006 to settle 340 lawsuits brought by consumers who complained of smell problems after using Zicam products. In addition, the FDA claims that the company had knowledge of 800 additional cases of consumer adverse events that were not reported to the FDA. The company claims it did not feel the number of complaints were more than would be expected of the general population and acted on the advice of counsel in not reporting the events.

“The key issue is who knew what and when,” Loren Israelsen, executive director of the United Natural Products Alliance (UNPA), told NBJ. “What is a serious adverse event, and in this case, is the loss of smell a serious adverse event? As I read the statute, I would say it is. The intriguing question is: What did Zicam’s counsel advise them?” In a conference call with reporters on June 17, Hemelt classified the company’s product liability insurance as being “very limited.”

In addition to the up-front costs associated with a potential product recall and the down-the-road costs associated with litigation, the company’s biggest challenge will be to control the scope of the damage to the brand. “Consumers tend to assume the worst and that the rest of the product line suffers from the same consumer perceptions,” Israelsen told NBJ. The company is bracing for a downturn in sales. It had initially forecasted revenue growth of 5% for its fiscal 2010 year, but those projections have been withdrawn.

It is still too early in the case to draw any broad conclusions on how firms can work to prevent disruptions in business such as this; however, companies should be vigilant and err on the side of caution when it comes to adverse event reporting. “Companies should be investigating, getting advice and making some tough decisions as to whether they ought to act on these things,” Israelsen said.

Matrixx maintains it has done nothing wrong and will work with the FDA to reach a favorable outcome in the case. “Matrixx Initiatives stands behind the science of its products and its belief that there is no causal link between its Zicam Cold Remedy intranasal gel products and anosmia,” said Hemelt in a company release. Matrixx’s price per share has fallen 73% in 7 days, with a trading price hovering slightly above $5 on June 22. U.S. consumers spent $795 million on homeopathic remedies in 2008, according to NBJ estimates.

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